The time when tax havens consisted of exotic islands where a few gangsters or corrupt dictators hid their fortunes is long gone. Tax havens have become sanctuaries for an array of multinational firms and their subsidiaries or corporate parents. They form part of the background to most of the financial crises and scandals of the last 20 years. "Madoff Spotlight Turns to Role of Offshore Funds," ran a New York Times headline on December 30, 2008. It had taken just 19 days after Bernard Madoff's $65 billion swindle broke into the open on December 11 to draw the link between the swindle and tax havens. (1)
Since the financial crisis of 2008, politicians' attitudes toward tax havens have changed. Government leaders now recognize that tax havens endanger public finances and their countries' political stability. The OECD is stepping up the fight against international tax fraud and, increasingly, promoting international tax transparency. At the London G20 summit in April 2009, countries announced the advent of a new era of transparency and tax cooperation. (2)
Despite these advances, the problem remains unresolved. Trillions of dollars continue to accumulate beyond the reach of government in tax havens, with the middle class left to fill the public coffers and make up for this shortfall. As protesters outside the G20 summit at Cannes, France, in November 2011 called for an end to tax havens, officials of the G20 inside issued a list of 11 countries, including Switzerland, that they said were doing too little to cooperate. (3) However, no sanctions were announced.
What is a tax haven?
According to a study published in December 2006 by the U.S. National Bureau of Economic Research, about 15 per cent of countries around the world are tax havens. Most of these countries appear to be financially well off and are relatively small in size. (4) Few OECD member countries have precise definitions, though. Most see tax havens as states with systems enabling nonresidents to shirk tax obligations to other governments, along with bank secrecy.
The OECD uses three criteria to determine whether a country is a tax haven: absence or near-absence of income taxes; absence of transparency in the tax system; and a refusal to exchange financial or tax information with other governments. In addition to tax havens, there are three other types of haven-type zones. In offshore zones that are home to banks, insurance companies or fund managers but lack a true financial regulatory apparatus, companies can avoid various restrictions by having addresses only in these states. Then there are bank havens, states characterized by a high level of bank or financial secrecy. Finally, there are judicial havens, which evade criminal and other laws generally adopted by other states and refuse any exchange of information with other states.
Some may be multihaven zones, falling into more than one of these categories. Strictly speaking, a tax haven differs from the three other types, but in practice these distinctions are often blurred. It is not uncommon for offshore zones to be regarded as tax havens.
Where are these tax havens located?
Ronen Palan, professor of international political economy at the University of Birmingham, separates tax havens into two geopolitical poles. (5) The first group gravitates around the London financial centre, mainly encompassing dependencies of the British Crown such as the Isle of Man, the Channel Islands of Jersey and Guernsey, the Cayman Islands, Bermuda, the British Virgin Islands, the Turks and Caicos and Gibraltar, as well as former parts of the British Empire such as Hong Kong, Singapore, Malta, the Bahamas, Bahrain and Dubai. The other group developed around economic activities in the rest of Europe and includes the Benelux countries (Belgium, the Netherlands and Luxembourg) together with Ireland and, of course, Switzerland and Liechtenstein. Two other tax havens, Panama and--to a small extent--Uruguay, operate independently of these poles.
Each year, the OECD draws up a list of uncooperative tax havens. In 2000, the OECD identified 38 such entities, most of them Caribbean and Pacific islands and European microstates. In 2009, in coordination with the G20 summit, the OECD published a new listing of tax havens divided into four categories, depending on the level of noncooperation (white, pale grey, dark grey and black). The white list encompasses jurisdictions that have broadly applied a standard of transparency and information exchange. This standard involves an obligation to exchange information on request in all taxation-related areas for the administration and application of national tax laws. The two grey lists cover tax havens and financial centres that have made commitments concerning this standard but have not yet applied it. To go from a grey list to the white list, countries must sign at least 12 agreements with other countries. Finally, the black list consists of jurisdictions that have not agreed to apply the internationally recognized tax standard. As of December 15, 2011, there weren't any countries on the black list and just three on the two grey lists (Nauru, Niue, Guatemala). (6)
These results are surprising. It is not as if there is any reason to believe tax havens are disappearing. In one year, tax havens such as Liechtenstein, the Cayman Islands, Monaco, the Bahamas, Bermuda and Singapore ended up on the white list by signing most of their information exchange agreements with other tax havens. (7) At the very least, it is too early to judge the effectiveness of the recently signed agreements, the application of which will be subject to meticulous follow-up by the Global Forum on Transparency and Exchange of Information for Tax Purposes. We will take a closer look at this body's role further on.
What are the results of tax havens?
Tax havens cause harm to countries that are not tax havens, which suffer deterioration of public finances, increased financial instability and injustice. Let us take a closer look at each of these problems.
The existence of tax havens leads to capital flight from non--tax havens, which are deprived of taxes they would otherwise collect as companies move head offices or activities to tax havens. On January 5, 2010, Canada's then--Revenue Minister Jean-Pierre Blackburn stated that Canadian companies and individuals had a total of C$146 billion invested in tax havens in 2009, a substantial increase from the $88 billion total in 2003. "Safeguarding cash in those places is not illegal," noted a Reuters report, "but makes it easier to avoid declaring income for tax purposes." (8)
The reported amounts are just approximations. Whether at the national or international level, nobody has yet managed to put an exact figure on the scale of revenues lost to tax havens. But there are some credible estimates.
* A study published in March 2010 by Global Financial Integrity, a Washington-based international organization that works to curtail illicit financial flows, estimates the total amount deposited by nonresidents in offshore financial centres and tax havens at about U8510 trillion (for the sake of comparison, annual worldwide GDP in 2010 was $74 trillion). The study also states that these deposits are growing by an average of 9 per cent a year, substantially more than the rate of increase of worldwide wealth in the last decade. (9)
* According to an October 2007 report published by Tax Analysts, a U.S. tax policy organization, "At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned...